Chris Anderson’s latest article in Wired is titled Free! Why $0.00 is the Future of Business. As I’ve talked about before, Chris’s basic argument is that marginal costs in IT are so low and dropping so fast that giving stuff away for free can make sense as a business model.

As he says, many costs in Internet markets look like fixed costs rather than marginal costs. So the marginal cost to Google of providing an extra web search is practically nil. But there are still massive fixed costs. Google runs thousands of servers in gigantic data centers. They use so much electricity that they’re investing in new electricity generation technologies, and they use so much bandwidth that they’re investing in a new trans-Pacific fiber-optic cable.

Anderson paints the trend towards free as being wonderful for consumers, and it is wonderful that I can do Google searches for free. However, when all costs are fixed and none are variable, we have a classic case of economies of scale. The big guy has the lowest average cost, and it’s hard for smaller guys to compete. Lack of competition is bad for consumers. In the search market, searchers don’t pay, but advertisers do. When we take the welfare of advertisers into account, it’s not clear that the economic outcomes in the search market are so wonderful after all. [However, Hal Varian disagrees that economies of scale are the source of Google’s high market share in search.]

Chris also has some wacky economic logic at some points. Check out this quote:

Two of the main scarcity functions of traditional economics — the marginal costs of manufacturing and distribution — are rushing headlong to zip. … Surely economics has something to say about that? It does. The word is externalities, a concept that holds that money is not the only scarcity in the world. Chief among the others are your time and respect, two factors that we’ve always known about but have only recently been able to measure properly.

Money is not a resource, money is just an illusion that we use to trade things. The concept of externalities is not that other things are scarce, but that people’s private actions often have effects on others which they don’t take into account. What I think Chris is really trying to say is that attention and reputation are scarce (I agree), and firms that give something away for free are not competing in price but rather in these other dimensions. Google and the other search engines compete in terms of reputation and attention on the searcher side of the market, and compete in price on the advertiser side of the market.

I’m not saying that Free! is totally wrong. I’m just saying that Free! makes for a great headline, but I don’t see anything intrinsically ‘good’ about it. Having all costs fixed and none variable does not necessarily generate an efficient market structure. And it could be that free web searchers with paid advertising is not the socially optimal pricing structure, once we take all welfare sources into account.

Over at Freakonomics, Hal Varian, chief economist at Google, answers a bunch of questions from readers. Here’s the question that I submitted and Hal’s answer:

Q: You once said that “marketing is the new finance,” because of the data and tools that are now available. In your opinion, what are the three most useful quantitative techniques for analyzing this kind of data? To what extent does Google use this type of analysis?

A: The three most important techniques, in my opinion, are: 1) experimental design and analysis; 2) regression; and 3) Bayesian methods. We use the first two extensively, and are beginning to use Bayesian techniques more.

I was hoping he’d be a bit more specific than “regression” … Anyway it’s interesting to see that Google uses experiments extensively.

Damn, I thought I’d thought of another brilliant web service that’ll make me a billionaire, but someone’s beat me to it yet again. My idea was that I sometimes come across sites or stories online that I want to bookmark and follow up later. I put them in a bookmarks folder called ‘follow up’, but I always forget and it’s a pain to remember to check them. So I thought you could have a web service to do this, which saves your bookmarks and sends you an email or publishes to an RSS feed at some time in the future to remind you to follow up. Which is exactly what TagMindr does. I like it. I just wish it worked with Google bookmarks.

Remember the joke about a dollar on the ground not being a real dollar because if it was then someone would have picked it up? Here is the corollary: A web business idea is not a real idea, because if it was, someone would have already done it.

Flying an airplane is complex, but like anything if you do it enough times it becomes routine. Nevertheless, pilots still use written checklists to make sure that they’ve done all the necessary things during important times like takeoff and landing, and during emergencies or abnormal situations.

This long and wonderful article in The New Yorker talks about an experiment to use checklists in medicine, particularly in intensive care. A procedure like inserting an IV line requires five or six steps to minimise the risk of potentially fatal infections. A study found that occasionally the doctors or nurses miss a step, and sometimes this leads to a bad outcome for the patient. Since people in intensive care have a lot of things done to them, the study found that on average two mistakes were made per patient per day. Something as simple as providing a checklist of steps lead to a dramatic improvement in patient outcomes at a few hospitals where it was tried. Basically, checklists seem to be an incredibly cost-effective way to save lives.

As the article explains, the trouble is getting doctors to accept the checklists. Using a list is basically admitting that you’re human and fallible, which may be a challenge to a doctor’s ego. The article is also worth reading for the incredible and detailed descriptions of what can be done in intensive care to save a person’s life:

We gave him a syringeful of anesthetic, and a resident slid a breathing tube into his throat. Another resident “lined him up.” She inserted a thin, two-inch-long needle and catheter through his upturned right wrist and into his radial artery, and then sewed the line to his skin with a silk suture. Next, she put in a central line—a twelve-inch catheter pushed into the jugular vein in his left neck. After she sewed that in place, and an X-ray showed its tip floating just where it was supposed to—inside his vena cava at the entrance to his heart—she put a third, slightly thicker line, for dialysis, through his right upper chest and into the subclavian vein, deep under the collarbone.

(HT: Cockpit Conversation)

Felix Salmon argues that all consumer magazines should be free online. I think he’s right in his assessment of magazine readers:

Eventually, magazine publishers will wake up and realise that they have three sets of readers. The first, and largest, is the online-only readers, who would never read the magazine. To maximize their numbers you want to put up as much content as possible in as timely a manner as possible. The second, and smallest, is the people who read the magazine both in print and online. These are your very best and most loyal readers: you want to treat them as well as you can, which once again means maximizing the value of the website and not needlessly crippling it. Finally, in between, there are the old-fashioned readers of the print product, who either subscribe or who buy it at the newsstand, and who then read it in an armchair or on a train or in a waiting room. This is not the kind of activity which can easily be replaced by a website.

I have one more point to add. Before I used the internet a lot, I did subscribe to or regularly buy a few magazines. Now I don’t buy any, but it’s not because I can read the content of those magazines online. It’s because there’s so many interesting blogs to read. Magazine publishers shouldn’t waste their time worrying about their own online content competing with their print magazine. They should worry about competition from other sources.